Systematic risk and market power: an application of Tobin's q

The authors investigate the relationship between systematic risk and market power measured by Tobin's q, the ratio of market value to replacement cost. They demonstrate that there is a one-to-one relationship between the Tobin's q ratio and the Subrahmanyam and Thomadakis measure of market power. The theoretical model predicts that as a firm's market power increases, the systematic risk will, ceteris paribus, decrease. The empirical results ultimately confirm this negative association as predicted by Subrahmanyam and Thomadakis. (Reprinted by permission of the publisher.)